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An Equilibrium Model of Deferred Prosecution Agreements

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  • Grenadier, Brian M.

    (Stanford U)

  • Grenadier, Steven R.

    (Stanford U)

Abstract

Deferred prosecution agreements (DPAs) are now a standard tool used by prosecutors to punish corporate crime. Under a DPA, the defendant escapes prosecution by living up to the terms of the contract. However, if the prosecutor declares a breach, the defendant may face immediate prosecution. We present an equilibrium theoretical model of the terms of a DPA, highlighting a little-recognized, yet potentially valuable benefit accorded the defendant: the option to breach. While at the initiation of the agreement, a breach might likely be seen as a much more painful outcome than adhering to the DPA, over time this situation could change. Using the tools of real option analysis, we demonstrate that DPAs may embed valuable optionality, particularly for longer-term agreements with significant uncertainty over future prosecution outcomes. Since DPA penalties must price in such optionality, naïve comparisons to agreements without optionality, such as plea bargains, will mistakenly conclude that DPA terms are overly onerous and oppressive.

Suggested Citation

  • Grenadier, Brian M. & Grenadier, Steven R., 2024. "An Equilibrium Model of Deferred Prosecution Agreements," Research Papers 4231, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:4231
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    File URL: https://www.gsb.stanford.edu/faculty-research/working-papers/equilibrium-model-deferred-prosecution-agreements
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